Baldwin County schools owe the IRS $10,937 penalty

LOXLEY, Alabama -- The Baldwin County school system will pay the IRS a $10,937 penalty to settle a disagreement the two entities had over the way the school district borrowed money in 2009 to make payroll.

Back then, Baldwin County took out what is known as a line of credit from a local bank for $35 million to pay the bills.

It’s a process several local school districts have used during these tight financial times to make payroll in the fall, when cash flow is at its lowest. That’s when state funding falls behind and before property tax revenue begins kicking in.

Baldwin County schools Chief Financial Officer John Wilson said the school district would take money out to write employees’ paychecks, then put money back in as it received a payment from the state.

In October 2009, the school district took out $8.4 million of that $35 million, and paid bills within five days.

But, the IRS claims that the school system took out the full $35 million and did not spend it within five days, as is required for such an entity to keep its tax-exempt status. That would be breaking what is known as the “safe harbor” rule.

Wilson said the school system never had the full $35 million at any given time. The most the school district ever had out was $25 million, he said.

The school district never earned interest off the money, as it followed a procedure where it spent whatever money it took out within five days, Wilson said. In fact, the school district had to pay about $180,000 worth of interest to the bank as it used the line of credit on into the first couple of months of 2010.

School officials have been working with a Birmingham attorney on the matter and were afraid the IRS penalty would be higher. Officials said, though, that the $10,937 is not too steep and that they are thankful that they were able to make payroll during those tough times.

Wilson said that if the school system has to do something similar in the future, it would take out individual lines of credit worth only what they need. And it would perform each action with a separate vote of the school board.

In 2009, the school board authorized the school district to take out the full $35 million line-of-credit, and for finance officials to use the money as needed without having to come back to the board.